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Shoppers Stop: Reaching out - Views on News from Equitymaster
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Shoppers Stop: Reaching out
Dec 28, 2005

Shoppers Stop is one of the pioneers in setting up pan-nation one-stop retail outlets, catering to the daily needs of the middle and upper middle class of the masses. Starting in 1991 with a single store in Mumbai, the company, over the years, added 15 stores in 9 cities (FY05). In the last 6 months (1HFY06), 4 more outlets were added to the tally. In this article, we take a look at the company’s current year performance and the opportunities it has going forward.

The sector in short…
The Indian retail sector has gone through a metamorphosis in the last three tears. From a mere 2% of market share in 2002, the organised sector currently has over 3% and is expected to capture atleast a 10% market share by 2010. Healthy GDP growth prospects and buoyancy in the services sector are likely to be the growth drivers going forward.

Retailers like Shoppers Stop, Pantaloon, Trent and Piramyd have already expanded their base and are looking at setting up new outlets across the country (including 2nd and 3rd tier cities). Not only are these companies setting up lifestyle stores but are also opening one-stop shops or hyper malls.

In this regard, while Pantaloon has already made significant progress (Big Bazaar), Trent and other smaller regional chains are expanding aggressively. Shoppers Stop would be setting up 2 such outlets before the end of FY06, thus taking its floor space up to over 1.1 million square feet. As of FY05, though the company’s sales per square feet are much below its peers (table below), it is likely to change. Presently, the company’s stores house products dished out by the leading brands of the world, which are either out of reach or not on the top of the mind of the common consumer. Keeping this in mind, the company has created its own branded products. These products have a two-fold effect:

  • Firstly they are at a much lower price than the branded goods (low advertising cost), thus enabling the company to capture the value-add.

  • Secondly, higher own product sales increases profitability.

As far as Shoppers Stop is concerned, private labels contributed to 18% to the topline in FY05. The company has indicated that this ratio will be higher, going forward.

Vis-ŕ-vis…
Consolidated - FY05 Shoppers Stop Trent Pantaloon**
Key parameters…      
Net sales (Rs m) 4,557 2,315 10,492
Operating profit (Rs m) 268 152 518
Operating margin (%) 5.9 6.6 4.9
Profit after tax (Rs m) 189 196 386
Net margin (%) 4.2 8.5 3.7
EPS (Rs) 6.9 14.9 17.5
P/E (x)* 63.3 61.9 96.7
The underlying…      
Number of stores (nos) 16 17 76
Stores added (nos) 4 3 14
Total square feet (m) 0.8 0.3 1.5
Revenue per store (Rs m) 285 136 138
Sales per sq. feet (Rs) 5,696 7,717 6,995
Operating profit per sq. feet (Rs) 335 508 345
Profit per sq. feet (Rs) 237 655 257
Inventory days (nos) 58 59 96
Working capital to sales (%) 13.9 29.3 13.8
* price close 21/12/2005, as the company was not listed in FY05.
** Standalone figures

As far as retailing is concerned, the key factor that makes a big difference to profitability is working capital management. This includes an inventory management infrastructure (not to carry too many old inventory, as it could go out of demand). When one calculates working capital as a percentage of net sales, the ratio stands at 14% for Shoppers Stop, which is commendable. However, as the company expands into hyper-malls, we expect working capital to come under pressure.

Our view on…
Management Aggressive, ambitious and well attuned to the present trends.
Industry Growth Huge, as majority still lies in the unorganised sector.
VAT implementation and FDI in retailing to benefit organised retailing
Company Standing Amongst the top retailers in the country,
though urban centric for now.
Entry Barriers Working capital intensive, prime real estate
availability and ability to handle stores at multiple locations.
Bargaining power of customers Very high.
Bargaining power of suppliers While a multi-product supplier has an upper hand,
it is balanced as the scale of operation increases,
sometimes even favoring the retailer.
Competition Very high from traditional retailers.

At the current price of Rs 436, the stock trades at a price to earnings multiple of 63.3 times 1HFY06 annualised earnings. Although valuations at the current juncture do look steep, the company’s focus on setting up new stores, 39 in all by the end of FY08, should result in a healthy topline growth. Of the targeted 6 stores in FY06, the company has already opened 4 stores. The full effect of the new stores will start reflecting partly in 2005 and fully in 2006. To that extent, the growth in topline as well as in net profits is likely to be on the higher side. Taking into account the growth and risks, we believe that the risk-reward equation is equally poised.

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